Skip to content

ACCA Applied Skills · Performance Management · Divisional performance and transfer pricing

Which one of the following is an advantage of using residual income rather than ROI to assess divisional managers?

Residual income encourages managers to accept any project whose return exceeds the cost of capital, because such a project increases the residual income. ROI can cause managers to reject projects that are good for the group but lower the divisional average.

  1. AIt allows direct percentage comparison of divisions of different sizes
  2. BIt is not affected by the way assets are valued
  3. CIt encourages acceptance of projects that earn more than the cost of capitalCorrect
  4. DIt removes the need to decide a cost of capital

Explanation

Residual income is profit less a capital charge, so any project earning more than the required rate increases it. This avoids the dysfunctional rejection of projects that ROI can cause. Residual income is an absolute figure, so it is not good for comparing divisions of different sizes. It still depends on asset valuation and needs a cost of capital.

Did you get it right without looking?

One question tells you little. A timed set on Divisional performance and transfer pricing shows your real accuracy, how long you take and where you lose marks.

Practise Divisional performance and transfer pricingFree diagnostic mock

More Divisional performance and transfer pricing questions